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What Credit Score Do Newcomers Start With in Canada?

Kiara Taylor

Aug 05, 2022 9 min read

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A woman holds a Canadian flag around her back as she looks at a mountain range.

Since there is no universal way of reporting credit between countries, newcomers to Canada start with a credit score of zero. A good credit score is essential to securing a mortgage, a car loan, or even renting an apartment, so you need to start building credit as soon as you arrive. 

This article will look at credit scores in Canada, how they work and are calculated, and how to build credit in Canada.

How Do Canadian Credit Scores Work?

In Canada, your credit score is a summary of your credit history. Your credit score is included in a credit report created whenever you apply for a loan or a new line of credit. Lenders transfer information about what types of credit you have to the credit bureaus (Equifax Canada and TransUnion).

At the most basic level, your credit score goes up as you use credit responsibly and down as you manage your credit poorly. Credit scores range between 300 and 900 in Canada.

What Is Considered a Good Credit in Canada?

When learning about credit, most people want to know what a good credit score is, but there is no “magic number” when it comes to having a good score. That being said, scores of 660 to 900 are usually rated as good, very good, or excellent. The higher your credit score, the easier it may be for you to get a loan or a lower interest rate.

What Is Considered a Bad Credit In Canada?

Like good credit, quantifying bad credit is difficult; however, scores below 660 are often viewed as representing a higher risk when it comes to giving out new credit. 

Scores under 660 are often associated with being unable to qualify for better loan terms. Scores below 560 generally fall into the “poor” category and will have an even more difficult time acquiring credit or qualifying for loans. In some provinces, a low credit score can even impact your car insurance rate. 

canada's credit system works

How Is Your Credit Score Calculated In Canada?

If you’re new to the country, you might wonder how credit scores are calculated in Canada. Canadian credit scores are calculated similarly to other countries, typically considering several factors that demonstrate your creditworthiness. 

1. Your History of Making Repayments

The most significant part of your credit score in Canada is your prior payment history. This includes your history of making timely payments to your lines of credit and your debt. When you stop making payments, make them late, or miss a payment, your score will inevitably go down.

Some financial experts believe that making timely payments is the single most important factor in your financial well-being and a huge component of your credit score. Failing to pay back your loans and debts on time signals to creditors that you are unlikely to pay back future loans and debts. 

If you’re struggling with late payments, consider contacting your lender before missing one to see if they have better payment plans. Sometimes lenders can lower your monthly payment or give you a grace period. But remember, making payments on time is key.

2. What Debts You Currently Hold

The total amount of debt you have also greatly impacts how your Canadian credit score is calculated. Your total debt is a combination of all the various types of credit you have, including loans, mortgages, and credit cards.

For some types of credit, like credit cards, the amount of credit you use falls under this umbrella. This is known as your credit utilization rate, (ie how much you are using of the total credit you have available across all your credit products). We advise our members to keep their credit utilization rate below 30%. So say you have two credit cards, each with a credit limit of $500, you would have $1000 in credit available to you in total. Our recommendation would be to keep your combined balances across both cards below $300 (30%) at any one time. 

Maxing out your credit cards and having large outstanding debt can have a huge impact on your score. The amount of debt you carry compared to your income is called leverage. Too much debt can indicate to lenders that you may be unable to make future credit payments. As a result, higher credit utilization will result in a lower overall score.

One way to avoid over-leveraging yourself can be to establish budgets for spending. You can also pay down your balance every month to avoid carrying a balance. Checking your Canadian credit score to see if you might be using too much credit can help you decide what financial path to take.

3. How Long You’ve Had Credit

If you’re a newcomer to Canada, the good news is that any bad credit history you may have will stay in your home country. The bad news is that your good credit history will stay behind as well.

Canadian credit companies will score you based on how long your line of credit has been open in Canada. If you don’t have very old credit, don’t fret; your credit age is typically not going to determine whether you’ll get a loan. However, having little Canadian credit history might make it more difficult, or you may face higher interest rates.

4. Whether You Have Credit Diversity

Having a good credit score means combining several factors. One factor considers the different types of credit you have, usually called credit diversity or credit mix. In Canada, it’s important to have multiple types of credit to ensure a high score.

Typically, credit is categorized as revolving credit, installment credit, and open-end credit. Revolving credit is an open-ended credit account with a set credit limit. As long as the account remains open and you make regular on-time payments, you’re free to use the account. The most common type of revolving credit is a credit card.

Installment credit is when you borrow a set amount from a lender and agree to pay it off in regular fixed payments over a set period. Examples of installment credit include things like a mortgage, car loan, or any other type of fixed loan.

Finally, open credit combines elements of both revolving and installment credit. Open credit requires you to pay a different amount every billing period, which is due in full. Open credit most often refers to a utility account, like gas, electric, or water payments.

If you don’t have a mixture of these various types of credit, don’t worry. Credit diversity helps to achieve a good score, but it is not the only way to achieve a good score. Building a credit mix takes time, especially if you’re new to Canada.

minimum monthly payment

5. Opening New Credit Lines

Another step to calculating your score is for credit reporting companies to check recently opened lines of credit or how many new inquiries you’ve had. Making frequent inquiries into credit for new loans or credit lines can hurt your score. Opening many new credit lines can signal that you’re taking out too many loans and might be unable to pay them back.

If you’re new to Canada, you might be looking to build credit to get a good rate on a mortgage or car. One way to avoid hurting your credit score is to only apply for loans you’re certain you will be approved for. You should also limit your credit applications to the credit you need and not open too many new lines of credit. Remember, every time you apply for a new loan or credit card, a hard inquiry is made onto your credit report, which is recorded.

6. Public Records

Finally, public records are also considered when calculating your credit score. Earlier, we discussed how open credit, like utilities, works. Failing to pay your bills can cause creditors to lose money, and they may turn to the courts to attempt to get their money back.

Court records regarding debt collection actions, bankruptcies, and even eviction judgments can turn up on your credit report. As long as you’re making your payments on time, you won’t have to worry about public records impacting your credit score.

How To Build Your Credit History as a Newcomer?

Now that you know how credit companies and credit unions calculate your credit score, you’re probably wondering how you can build a good credit history as a newcomer to Canada. Building credit is important if you’re looking to purchase a car with a low interest rate or if you want to be approved for a home loan.

Get a Secured Credit Card

If you have limited credit history or no credit history, a secured credit card can be a great place to start building your score. Secured Canadian credit cards are easier to acquire for individuals without (much) credit history or those with bad credit history.

Secured credit cards are a type of credit card where you pay a fixed security deposit to the lender before being extended credit. The lender then holds onto this money as long as the account remains open. If you miss a payment or are late making a payment, the lender can then take the secured payment to cover your installment.

established credit history

Get a Credit Builder Loan

Credit builder loans, like the one offered by Borrowell, are another great option for people new to Canada. Credit builder loans are designed specifically for people with no credit history, so you will likely be approved for it even with a credit score of zero. 

Unlike traditional loans, credit builder loans don’t pay you your money upfront. With a credit builder loan, you make fixed payments to a lender over time, and they then transfer the loan amount to you at the end of the loan period. For this reason, it’s often useful to think of a credit builder loan as a kind of savings program.

Make Timely Payments

The most frequent mistake people make when building credit is failing to make their payments on time or they miss their payments. If you’re new to Canada and trying to build a good credit score, making timely payments on your loans and credit accounts is essential. This includes utilities, car loans, credit card payments, mortgage loans, and even your cell phone bill!

Get a Cell Phone Plan

One way to build credit that you might not have considered is establishing a new cell phone plan. If you’re new to Canada, acquiring a cell phone plan is important for its own reasons, but it can also help you build credit. Cell phone plans can have a big impact on your score in several ways.

First, if you decide to start a new cell phone plan, you might choose to finance a phone. Financing a phone will require a credit check to get you approved. As part of your cell phone plan, you’ll be required to make timely payments on your phone in addition to your monthly cell phone bill.

Second, you’ll have to make payments on your cell phone bill. Your bill will be treated similarly to other open credit types of accounts. Failing to make a payment can harm your score. On the other hand, making timely payments will help build good credit and give you a solid foundation for future loans!

The Bottom Line

Building credit isn’t rocket science, but it can be intimidating at first. Whether you’re new to Canada or just looking to rebuild your credit, understanding how your score is calculated and what factors are important are key to building a good credit score. Following the helpful tips in this article, you’ll soon see your credit rising.

Kiara Taylor
Kiara Taylor

Kiara Taylor is a financial analyst and writer with over 10 years of experience in the finance industry. She has contributed to publications such as Investopedia, The Balance, Crunchbase, and Harvard Business Review. Kiara is fascinated by fintech’s capacity to increase accessibility to financial products and services, and she is an active proponent of increased diversity in the finance space.

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